Barry Hicks owns a building with a capital cost of $200,000, a UCC balance of $150,000, and a fair market value of $600,000.This property is transferred to a corporation under the provisions of ITA 85(1).The corporation assumes the $50,000 mortgage on the build- ing.In return for the building, Barry receives a promissory note for $40,000 and preferred shares with a fair market value of $510,000.If Barry elects a value that will maximize tax deferral, the adjusted cost base of the preferred shares is:
A)Nil.
B)$60,000.
C)$110,000.
D)$600,000.

Question

Quizplus · Accepted Answer

The elected amount under ITA 85(1) should be the lesser of the FMV of the consideration received ($600,000) and the UCC ($150,000) plus the mortgage assumed ($50,000), which is $200,000. The ACB of the preferred shares is the elected amount minus the promissory note, which is $200,000 - $40,000 = $160,000. However, the question asks for the ACB that maximizes tax deferral, which would be the elected amount minus the mortgage assumed, resulting in $200,000 - $50,000 = $150,000. Since the ACB of the preferred shares is the elected amount minus the promissory note, it is $150,000 - $40,000 = $110,000.

Barry Hicks Owns a Building with a Capital Cost of $200,000